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How Does Goal-Oriented Targeting Work?

July 15
00:03 2014

Ever notice those late night TV ads. They always tell you “only” have to pay five “easy” installments of $25 (actually “$24.95”). They never tell you the darn thing costs $125.00. Why do you think this is so?700724_51725745_darts_stock_xchng_royalty_free_300

You know full why. You know most people see “$25” and think $25. You know they don’t do the math and think $125. You also know “$25” gets their attention while $125 makes them turn the channel. Essentially, big numbers tend to scare people away. Numbers with more than 5 digits, well, most people just don’t swim in that pool. In fact, even five digits many be foreign to a lot of people. On the other hand, they’re more comfortable with the small numbers they see every day. It’s a fairly standard marketing tactic, long accepted by salesman and consumers alike.

This tells you why that “What’s Your Number” commercial that showed those really big (usually seven or eight figure – that’s $1 million+) numbers didn’t inspire folks. It also tells us why Goal-Oriented Targeting works.

Here’s why. Let’s say you’re 28 years old and you’ve been working for a really nice company for five years. You’re making a cool $62,500 a year. Under most rules of thumb, your projected retirement income need is 80% of your salary. In your case, that’s $50,000. Let’s say you think you can earn 3% a year once you retire. That’s a reasonable return, right? After all, the average return of stocks in the long run is a whopping 10%, so 3% sounds not only doable, but almost too small. Let’s say you also want your projected income need to equal 5% of your total retirement assets when you retire (that’s what many experts advise). Given this and a 3% annual return rate, you won’t run out of money for 31 years after you retire. Do you expect to live past 101? If so, let’s increase that annual return rate to 4% (remember, we thought 3% might have been too small to begin with). In this case, you get to live to 110 before you run out of money. Sound good enough to you?

OK, well, here’s the kicker. In order for this to work you need to save a total of $1,000,000.

Under the “What’s Your Number” scenario, that’s the number that floats above your head: $1,000,000. Look at it. Look at it again. Here, maybe this will help:

1,000,000

Unless you’re a Rockefeller (hmm, that expression might be too old for some to understand), those seven digits represent something you only see when playing Monopoly. That’s one big honkin’ number. It’s the stuff Lotteries are made of. It’s not for regular folks. Heck, you barely got $19,000 in your 401k and you’re only putting away well less than two-thousand dollars ($1,875, to be exact) a year. Given this reality, the typical response when people see a number this large is, “Not me. Ain’t gonna happen.”

But wait, remember those late night TV commercials that offered such great deals. Well, have I got a deal for you. It’s called Goal-Oriented Targeting and here’s how it works.

Since your company matches one-for-one up to 3% of your salary, you decided long ago to contribute that same 3% of your salary. That’s your $1,875 annual contribution. Of course, you need to add your company’s match, so the total amount of money contributed to your account every year is $3,750. Adding up all those annual contributions over the next 42 years (did I tell you you’re retiring at the age of 70) gives you only $157,500, well below the required million dollars. You can add in your current total ($19,000) and that gives you $176,500, still more than five times less than what you need.

Now, if you believe Social Security will remain around by the time you retire, then, based on Social Security’s Quick Estimator Calculator, the Administration will chip in more than half ($31,092) of your projected retirement need. That’s a good thing. But, even with Social Security, you’ve still got to more than double your money.

By now, you’re probably asking “What’s the catch? There’s gotta be a catch.” Well, there is. Given all these numbers (and, granted, there’s been a lot being thrown around – that’s why it’s good to have a professional riding shotgun with you when you do this) what’s the average annual return needed to meet your goal.

Wait for it…

It’s 2.97% per year.

Remember what we said about 3% per year being a ridiculously low expectation for an annual return. Well, that’s all you need.

Think about it. If, instead of leading with that big ol’ seven digit number like that commercial did, when you ask, “Hey! What’s My Number?” what if the answer is “3%,” as in, “you only need to keep doing what you’re doing and earn a minimum investment return of 3% on average every year.”

You can do 3%, right? Heck, you can probably do a lot more. If you can make to an average 6.17% a year (still a reasonably low number since the average return on stocks is 10% a year), then you don’t even have to worry about Social Security – you won’t need it!

Goal-Oriented Targeting works because it changes the point of view from which you talk about your retirement account. No longer do you focus on big numbers or total assets. Sure, those numbers are still out there if you want to see them, but since they act as de-motivators for most people, you can stay focused on your Goal-Oriented Target numbers.

How many times have people walked into a retirement planning meeting dour and depressed only to leave all smiles and with a bounce in their step. That’s the power of Goal-Oriented Targeting. It re-orients your thinking to make achieving your own comfortable retirement much clearer.

Sure, Goal-Oriented Targeting works because it’s easy to understand a smaller number than a larger number. But how do you know what that goal should be based on? How will you know if you’re ready to retire? That’s a pretty important question. Believe it or not, researchers and professionals believe they know the answer. You can read their thoughts in “Why a 401k Fiduciary Must Convince Retirement Investors to Avoid Thinking in Lump Sum Terms” (FiduciaryNews.com, July 29, 2014).

Interested in learning more about issues facing today’s 401k investors and how professionals advise them? Check out Mr. Carosa’s upcoming book Hey! What’s My Number?, available later this summer.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

About Author

Christopher Carosa, CTFA

Christopher Carosa, CTFA

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4 Comments

  1. Dmitriy Konyayev
    Dmitriy Konyayev January 27, 08:57

    Hi, I read a few articles this morning on goal-oriented-target for retirement. I don’t know if I understand the actual premise. Is the argument to change retirement point of view from some final number to consistent year-to-year return? How does a switch to goal-oriented-target impact asset allocation?

  2. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author January 27, 11:19

    Dmitriy – That’s the benefit of using Goal-Oriented Targeting – it can work with any investment philosophy you use. The examples used in the articles we have published have traditionally used only equity returns, but there’s no reason you can’t apply any particular asset allocation you’d like. Indeed, you may find that GOT provides more illumination when it comes to using different asset allocations. For example (in the extreme), you might have a GOT of 8% for a 25 year old, which is a quite acceptable GOT for a 40 year period when investing in 100% equities. On the other hand, it is dangerously high if investing in 100% bonds. If the investor wants a 100% bond asset allocation, then he will have to address one of the other components (annual contribution, retirement date, etc…) to get the GOT down to a reasonable number given the desired asset allocation. (If you’re interested in as interesting perspective on asset allocation itself, you might want to see our series on the Fifth Deadly Sin – Asset Allocation for more on this).

  3. Dmitriy Konyayev
    Dmitriy Konyayev January 27, 20:01

    So to make sure I understand – the “goal” is earn a fixed annual return (say 3%) on my portfolio, regardless of all other factors. So in a year with a down market I should find a seek alternatives to reach the “goal”, such as increase contributions?

  4. Christopher Carosa, CTFA
    Christopher Carosa, CTFA Author January 27, 23:19

    Dmitriy: Whether to use a hypothetical 3% GOT as a fixed return requirement or as an annual return target is up to the individual making the investment decision. The GOT is just a mathematical construct. It’s hard data. It makes no statement as to how to invest. What it does tell you is this: In the case of a 3% GOT, if you’re investing in true fixed income assets (i.e., actual bonds where the principal is secure and not in bond funds where the principal floats), you’ll need to limit yourself to instruments with a minimum interest rate of 3%. On the other hand, if you’re investing in securities whose prices fluctuate (and may or may not pay income), then you’re goal is to achieve an average return of 3% over the projected time period. Volatility doesn’t matter as long as the average return at the end of the period is at least 3%. Realize, there’s no guarantees with regard to investing in instruments whose price fluctuates, but at least you know what your target is. Again, how you get there is an individual decision.

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